Progress and Impact of the Insolvency and Bankruptcy Code (IBC) in India

1. Progress in Implementation of IBC:

• Introduction and Objectives:
  • Enactment: The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to provide a comprehensive framework for insolvency resolution and bankruptcy in India. The primary objectives are to expedite the resolution process, maximize asset recovery, and balance the interests of creditors and debtors.
• Operational Developments:
  • Insolvency Resolution Process (IRP): The IBC has established a structured Insolvency Resolution Process, including the appointment of Insolvency Resolution Professionals (IRPs) and the formation of Committee of Creditors (CoC). This process aims to ensure timely resolution of insolvency cases.
  • Judicial and Administrative Support: The establishment of National Company Law Tribunals (NCLTs) and the National Company Law Appellate Tribunal (NCLAT) has streamlined the adjudication of insolvency cases. The introduction of the Insolvency and Bankruptcy Board of India (IBBI) has further supported the implementation of IBC by overseeing and regulating insolvency professionals.

2. Impact on Resolution of Stressed Assets:

• Asset Recovery and Resolution:
  • Increased Resolution Cases: The IBC has led to the resolution of several high-profile stressed assets. For instance, the resolution of the Essar Steel case in 2019 underlined the effectiveness of the IBC in recovering dues from large, distressed companies. ArcelorMittal’s acquisition of Essar Steel for ₹42,000 crore marked one of the largest resolutions under the IBC.
  • Recovery Rates: The recovery rate for creditors has improved under the IBC framework. According to the IBBI, the average recovery rate for financial creditors increased to approximately 45% in recent years, compared to significantly lower rates before the implementation of IBC.
• Resolution Timeliness:
  • Adherence to Timelines: The IBC mandates a resolution timeline of 180 days, extendable by an additional 90 days. While adherence to this timeline has been challenging in some cases, efforts to expedite the process and address delays have been ongoing. For example, the resolution of the Videocon Industries case has been extended due to complex legal and financial issues, but significant progress is being made.

3. Improvement of Credit Discipline:

• Credit Risk Management:
  • Enhanced Monitoring: The IBC has incentivized financial institutions to enhance their credit risk management practices. Banks and lenders are now more diligent in their due diligence processes, and there is increased emphasis on assessing the creditworthiness of borrowers.
  • Impact on Loan Recovery: The threat of insolvency proceedings has led to improved recovery efforts by lenders. For instance, the resolution of the Jet Airways case has highlighted the necessity for banks to actively pursue recovery and restructuring before insolvency proceedings are initiated.
• Behavioral Changes:
  • Reduction in Non-Performing Assets (NPAs): The IBC has contributed to a reduction in NPAs by providing a structured mechanism for addressing bad loans. The banking sector has reported a decline in NPAs as more cases are resolved under the IBC framework.

4. Overall Efficiency of the Financial System:

• Systemic Efficiency:
  • Streamlined Process: The IBC has improved the overall efficiency of the financial system by providing a clear and time-bound process for insolvency resolution. This has enhanced confidence among investors and creditors. For example, the resolution of stressed assets like Alok Industries and Bhushan Power & Steel has streamlined asset management and restored operational efficiency.
  • Legal Reforms: The continuous amendments and updates to the IBC, such as the introduction of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, have strengthened the framework by addressing legal and procedural challenges. The amendments aim to provide clarity on issues such as the treatment of operational creditors and the role of the CoC.

Recent Examples and Outcomes:

• Essar Steel Case: The resolution of Essar Steel was a landmark case demonstrating the effectiveness of IBC. ArcelorMittal’s successful bid and the recovery of ₹42,000 crore from Essar Steel showcased the IBC’s ability to facilitate large-scale asset resolutions.
• Jet Airways: The ongoing resolution process of Jet Airways, one of India’s major airlines, reflects the complexities involved in insolvency proceedings. Despite delays, the case highlights the importance of IBC in addressing significant business failures and restructuring challenges.

Conclusion

The Insolvency and Bankruptcy Code (IBC) has made significant progress in addressing the resolution of stressed assets, improving credit discipline, and enhancing the efficiency of the financial system in India. The implementation of IBC has facilitated the recovery of distressed assets, encouraged better credit risk management, and streamlined the insolvency resolution process. Despite challenges and ongoing developments, the IBC remains a critical framework for strengthening the financial sector and ensuring sustainable economic growth.